Jeff Judy

Jeff's Thoughts - August 5, 2009

Pick a Number

Many bankers spend a lot of time looking for "the right number," and even more time ignoring anything that doesn't have a number attached to it.

Please understand, I am all in favor of objective tools, useful measures that give us insights into how a business works. But I don't think that numbers are a good substitute for thinking.

At one time, long ago, "character lending" was the norm. Bankers made lending decisions based on "gut feeling," "intuition," and "trust." They came to a subjective conclusion about what the management of a business, or an individual consumer, was likely to do in the future, what challenges they might face and how they might meet them, and then acted accordingly.

Now we have powerful tools that will do all of our thinking for us if we let them. The pendulum has swung so far the other way that "subjective" is clearly a dirty word in today's industry.

Some bankers believe "numbers don't lie."Boy, that's a hot one! True, a really convincing liar, in the old days, could fool a banker, no doubt about it. These days, the really convincing liars hire really good accountants, and carefully manage their own numbers to convey an impression of success and solidity that is unwarranted. The last few years have seen the collapse of some huge corporations when it turned out that their numbers were nothing but lies.

A lot of bankers, I believe, turn everything over to the software because they don't like to be held accountable for their recommendations and decisions.They would rather lose money on a borrower and be able to say, "They were above the cutoff," than take the chance of turning away business that they believe, but cannot prove, will turn out badly.

As in most things in life, balance is the key. You can get optimal results by plugging objective numbers into a subjective context.

Use your knowledge of the customer's industry, market and economic conditions, business trends, regulatory environments, and the expertise, the service culture, the resources, and the risk appetite of your bank to predict a set of numbers that would describe success. When you "run the numbers" next year, and the year after, what do you have to see to make you feel comfortable that the relationship is mutually beneficial?

Run multiple projections scenarios, with a variety of conditions, to see when (not just if) the customer's numbers fall in your comfort zone. Your job is not to find a scenario that works. Your job is to explore possible paths that you, the business, and the environment might follow, and then to come to a conclusion -- fundamentally, a subjective conclusion supported by objective measurements -- about the likelihood of good outcomes from the relationship.

The most important numbers related to a customer are the numbers YOU pick as criteria for success. Or, to put it another way, meeting expectations tells you more than meeting thresholds.

Don't be satisfied if your customer still "clears the cutoff" next year, but doesn't come in as high as you expected. Take a closer look at the customer who falls short of the software thresholds, but performs much better than you anticipated.

In the most successful banks, staff aren't afraid to make judgments about where the numbers should go, about the trends they should see, about the targets customers should hit. They are willing to turn over a lot of labor to their "calculation engines," but they are not quite willing to turn all of their thinking over to "decision engines."

After all, any given customer's numbers will spit out the same credit score, the same ratios, in one software application after another. It is only when the banker is willing to apply a little subjectivity, to embrace some of the responsibility for deciding what the numbers mean, that there is any opportunity for building competitive advantage by making better decisions about customer relationships.